A broad range of assets should also help reduce volatility of annual returns, providing a smoother road for investors in times of upheaval in the financial markets.
This is extremely important for HNW investors that frequently sell down their holdings to fund their lifestyle, meaning they are less likely to sell during a pronounced dip in capital value.
This diversification could include non-correlated assets, whether bonds, commodities or alternatives such as property and private equity.
In theory, these would react differently to market movements, again, smoothing volatility and avoiding excessive risk concentrations.
However, alternative strategies are often less liquid, meaning a high net worth investor’s investment horizon should be considered before taking the plunge.
A global perspective
Diversification should not just be limited to asset classes, however.
HNW investors should ensure their portfolios have a global perspective.
If we look at equities, given the international nature of the world’s largest companies, investors may think that their exposure to large, domestically-listed companies already provides good global diversification.
You only have to look at Shell, BP, and HSBC in the FTSE 100, for instance to understand the sheer amount of revenues that are generated overseas.
However, in staying close to home, investors may miss out on the best-in-class companies listed in other countries, and could have a less diversified sector exposure than a global portfolio allows.
Furthermore, global diversity allows investors to hedge against localised economic or political events that will hit investment performance. This, again reduces volatility in returns.
Dividend payments
Dividends are a key weapon in an investor’s long-term investment arsenal.
For HNWs living off the natural yield of their investments, the income being delivered by stocks and shares is especially important, with bond yields at historic lows.
In the UK for instance, while UK 10-year gilt yields stood at just 0.69 per cent in the second quarter of 2019, yields on UK-listed equities stood at 4.2 per cent.
And while income from a bond will not increase over its life cycle, the same is not true of dividend payments from companies.
The importance of dividends is not just limited to those seeking an income – but also affects those seeking to preserve and grow their capital.
The income can provide something of a cushion should the underlying stock price fall – important if capital appreciation is less likely in times of market turbulence.
Moreover, dividends account for a very large proportion of equity returns.
Research by Schroders, for instance, highlights that investors in MSCI World would have seen capital growth of 323 per cent over a 25-year period without dividends.
However, the compounded growth of reinvested dividends brings turbocharged returns of 640 per cent.[
The succession planning imperative
